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Optimal regulation of lumpy investments

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  • Gijsbert Zwart
  • Peter Broer

Abstract

We study optimal timing of regulated investment in a real options setting, in which the regulated monopolist has private information on investment costs. In solving the ensuing agency problem, the regulator trades off investment timing inefficiency against the dead-weight loss arising from high price caps. We show that optimal regulation is implemented by a price cap that decreases as a function of the monopolist's chosen investment time.

Suggested Citation

  • Gijsbert Zwart & Peter Broer, 2012. "Optimal regulation of lumpy investments," CPB Discussion Paper 214, CPB Netherlands Bureau for Economic Policy Analysis.
    • Handle: RePEc:cpb:discus:214
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    References listed on IDEAS

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    Cited by:

    1. Panova, Elena & Garrett, Daniel F., 2023. "Regulating investments when both costs and need are private," TSE Working Papers 23-1429, Toulouse School of Economics (TSE).
    2. Arve, Malin & Zwart, Gijsbert, 2023. "Optimal procurement and investment in new technologies under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    3. Brito Duarte & Pereira Pedro & Vareda João, 2013. "Investment, Dynamic Consistency and the Sectoral Regulator’s Objective," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 563-594, August.
    4. Wen, Xingang & Hagspiel, V. & Kort, Peter M., 2017. "Subsidized Capacity Investment under Uncertainty," Discussion Paper 2017-043, Tilburg University, Center for Economic Research.
    5. Borrmann, Jörg & Brunekreeft, Gert, 2020. "The timing of monopoly investment under cost-based and price-based regulation," Utilities Policy, Elsevier, vol. 66(C).
    6. Lavrutich, Maria & Hagspiel, Verena & Siddiqui, Afzal S., 2023. "Transmission investment under uncertainty: Reconciling private and public incentives," European Journal of Operational Research, Elsevier, vol. 304(3), pages 1167-1188.
    7. Zwart, Gijsbert, 2021. "Optimal regulation of energy network expansion when costs are stochastic," Journal of Economic Dynamics and Control, Elsevier, vol. 126(C).
    8. Willems, Bert & Zwart, Gijsbert, 2016. "Regulatory Holidays and Optimal Network Expansion," Other publications TiSEM 27b0bab0-e60a-4682-aec0-1, Tilburg University, School of Economics and Management.
    9. Zwart, Gijsbert & Willems, Bert, 2016. "Regulatory holidays and optimal network expansion," Research Report 16007-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    10. Michael Crew & Rami Kahlon, 2014. "Guaranteed return regulation: a case study of regulation of water in California," Journal of Regulatory Economics, Springer, vol. 46(1), pages 112-121, August.
    11. Marco Buso & Cesare Dosi & Michele Moretto, 2021. "Do exit options increase the value for money of public–private partnerships?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(4), pages 721-742, November.
    12. Willems, Bert & Zwart, Gijsbert, 2016. "Regulatory Holidays and Optimal Network Expansion," Other publications TiSEM 847d55aa-b930-432e-a927-1, Tilburg University, School of Economics and Management.
    13. Marco Buso & Cesare Dosi & Michele Moretto, 2018. "Termination Fees and Contract Design in Public-Private Partnerships," "Marco Fanno" Working Papers 0227, Dipartimento di Scienze Economiche "Marco Fanno".
    14. Wen, Xingang & Hagspiel, V. & Kort, Peter M., 2017. "Subsidized Capacity Investment under Uncertainty," Other publications TiSEM 4c7a7c87-a34c-4934-a910-5, Tilburg University, School of Economics and Management.
    15. Bigerna, Simona & Wen, Xingang & Hagspiel, Verena & Kort, Peter M., 2019. "Green electricity investments: Environmental target and the optimal subsidy," European Journal of Operational Research, Elsevier, vol. 279(2), pages 635-644.
    16. Maarten van Oosterhout & Gijsbert Zwart, 2023. "Distortions in Investment Timing and Quantity in Real Options with Asymmetric Information," De Economist, Springer, vol. 171(4), pages 347-365, December.
    17. Zormpas, Dimitrios, 2020. "Investments under vertical relations and agency conflicts: A real options approach," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 273-287.
    18. Marco Buso & Cesare Dosi & Michele Moretto, 2023. "Taxation of Public Franchises with Persistent Demand Shocks," "Marco Fanno" Working Papers 0306, Dipartimento di Scienze Economiche "Marco Fanno".
    19. Willems, Bert & Zwart, Gijsbert, 2016. "Regulatory Holidays and Optimal Network Expansion," Other publications TiSEM b9cd661e-1707-47a2-b63a-3, Tilburg University, School of Economics and Management.
    20. Simona Bigerna & Xingang Wen & Verena Hagspiel & Peter M. Kort, 2018. "Green Electricity Investments: Environmental Target and the Optimal Subsidy," Quaderni del Dipartimento di Economia, Finanza e Statistica 29/2018, Università di Perugia, Dipartimento Economia.
    21. Marques, Vítor & Bento, Nuno & Costa, Paulo Moisés, 2014. "The “Smart Paradox”: Stimulate the deployment of smart grids with effective regulatory instruments," Energy, Elsevier, vol. 69(C), pages 96-103.
    22. Guthrie, Graeme, 2020. "Regulation, welfare, and the risk of asset stranding," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 273-287.

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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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